SunRice board considers legal action

The board behind Australia’s last export monopoly, SunRice, has been forced to defend its endorsement of a takeover by Spain’s Ebro after a major shareholder commissioned an independent review that found the bid undervalued the target by as much as $100 million.

SunRice said the review by DMR Corporate of an expert report by ­valuers Lonergan Edwards that found in favour of the bid was biased and misleading, and it was considering possible legal action.

The report was commissioned by rice grower Julian Menegazzo, the biggest shareholder in SunRice. He has publicly opposed the bid, putting him at odds with other shareholders including his brother and with stock- broking doyen Colin Bell.

SunRice shareholders, who are due to vote on the offer on May 31, are divided about whether to sell to Ebro, the world’s largest rice trader, after rains earlier this year improved the outlook for growers.

in a letter to grower shareholders Sunrice’s board said itg was considering what action to take over the report. The threat, which could include legal action, comes as Ebro chief executive Antonio Hernandez Callejas is expected to meet shareholders in Australia later this week to ease concerns over the bid, which was launched in October.

Some shareholders are arguing that historical valuations for the company capture years of underperformance created by the drought, which cut ­production.

They argue the bid fails to capture earnings upside from larger crops that are being planted following soaking rains in the past year.

DMR argued Lonergan Edwards applied the wrong multiples to future maintainable earnings of $70 million. It says the valuation should not have used a starting multiple of 6.8 per cent to 7 per cent earnings before interest, tax, depreciation and amortisation (EBITDA). Lonergan Edwards’ calculated an equity value of $284.8 million to $319.8 million for the company, whereas DMR gave it an equity value of $338.4 million to $417.6 million.

Related Quotes

Company Profile

DMR also says Lonergan Edwards’ report undervalues SunRice’s equity by the profits and cash generated between October 2010 and the present date.

SunRice chairman
Gerry Lawson
did not return calls by The Australian Financial Review. But in a statement to the National Stock Exchange he said the DMR report contained a number of errors, and was biased and misleading. “In light of its concerns, the board of SunRice is considering what action it should take in respect of the report," he wrote in a letter to shareholders ­yesterday.

It is understood legal action is one of the options under consideration as is a possible referral to the corporate ­regulator.

Mr Lawson said DMR had used a historical multiple on future earnings, used a net debt figure at October 31 rather than average net borrowings, and did not provide a value for A and B class shares.

It said DMR’s report was not provided to the Australian Securities and Investments Commission for review, even though DMR are not required to.Mr Menegazzo said he believed SunRice was worth more than Ebro was offering and that he was motivated to inform shareholders.

“We are in a democracy. Everyone can say what they like," he said.

“My motive is to get information to shareholders and to myself. People can make threats but I did what I did with a clear conscience."

The Australian Securities and Investments Commission has previously expressed concerns about DMR’s expertise, saying a report it made on oil company Moby Oil & Gas may have been misleading.

In defending the SunRice report which DMR Corporate criticised, Lonergan Edwards’ Craig Edwards said he had used consistent metrics such as forecast earnings with forecast multiples, but that DMR had not.

Instead DMR used historical multiples with a future maintainable earnings of $70 million despite acknowledging one of the most frequent errors made in valuations of companies was inconsistent application of price earnings ratios.

SunRice has said its fiscal 2011 earnings before EBITDA would not be significantly different from its 2010 EBITDA of $53.5 million.

That equates to a difference in forward earnings of about $16 million which, using DMR’s historical multiple of 8.6, adds $140 million or $2.60 per share more to Ebro’s $5.02 offer.

“This inconsistent application results in a material overstatement of the value of SunRice," the board said in a letter to shareholders.

The board also said it was concerned about an unsubstantiated comment by DMR that “a shareholder could expect to receive an offer based on a [price-earnings] multiple of . . . 15.6 to 19.4".